Something's off here.
At the beginning of the US session today US President Donald Trump announced a deal has been made between the US and China.
This news in my opinion should have sparked a huge rally in the stock market and a strong sell-off in risk assets such as gold and the Japanese Yen.
But it didn't.
To add to this we had a CPI (Consumer Price Index) data drop, seeing Core CPI increase by just 0.1% vs the 0.3% forecasted by most analysts.
This seems to have had a bigger reaction than the trade deal with China.
So it begs the question, is the market now leaning back to tier 1 data over political gameplay?
Is there a deal?
So what we can determine so far is that the US and China have come to some sort of deal that involves 55% tariffs on China still.
The US President wrote:
"OUR DEAL WITH CHINA IS DONE, SUBJECT TO FINAL APPROVAL WITH PRESIDENT XI AND ME. FULL MAGNETS, AND ANY NECESSARY RARE EARTHS, WILL BE SUPPLIED, UP FRONT, BY CHINA. LIKEWISE, WE WILL PROVIDE TO CHINA WHAT WAS AGREED TO, INCLUDING CHINESE STUDENTS USING OUR COLLEGES AND UNIVERSITIES (WHICH HAS ALWAYS BEEN GOOD WITH ME!). WE ARE GETTING A TOTAL OF 55% TARIFFS, CHINA IS GETTING 10%. RELATIONSHIP IS EXCELLENT! THANK YOU FOR YOUR ATTENTION TO THIS MATTER!"
Stocks did stir at this time, and the S&P500 pre-market whipsawed in a 241-point range ahead of the CPI data.
Gold remains subdued, and that may have surprised many as earlier in the month when Trump announced progress with China, prices of the precious metal fell. This time around prices remain rangebound.
I think the market didn't react as aggressively because this still needs to be approved by China's President Xi, which means this deal right now is just hot air by the President.
If China refuses the deal then the trade talks are back to square one.
I guess the market doesn't want to get too ahead of itself like last time when the trade tariff announcements came around.
CPI improves
Adding on from his China deal comments, the US President also said that the Federal Reserve should cut interest rates by a "full point".
This came after some positivity in the inflation numbers which didn't rise as many forecasted.
However, this data only accounts for half the tariff situation, so we need to look towards PPIs to get the forward-looking sentiment of the market.
The market did react to this data drop though, the S&P500 gapped higher by 216 points. Subsequently, the price then retraced and closed that gap.
As expected the USD fell sharply alongside government bond yields, seeing EURUSD continue its recent bullish run.
What about rates?
The CME FedWatch tool which helps traders identify what the market is pricing in shows expectations of two cuts this year.
One 25 basis point cut in September and one 25 basis point cut in December.
The rate cut probabilities rose from 53% to 57.2% in September after the CPI data was announced.
This could cause the USD to remain under pressure in the short term.
However, this could swiftly change.
If the forward-looking inflation data such as the PPI comes in above expectations then this may prompt a bit of a 'wait and see' approach again, meaning the Fed may look to hold.
What now?
All in all, today's market reaction, or lack thereof, suggests that investors are becoming more discerning.
The CPI data clearly moved the needle more than yet another bold trade announcement from the U.S. President. This could indicate a shift where the market is prioritizing hard economic data over political headlines, especially when those headlines come with strings attached or lack final confirmation.
With PPI data and Fed decisions still to come, traders appear cautious, waiting for substance over speculation. Until then, markets may continue to tread water, not on what’s said, but on what’s shown.
